Exchange rates and fundamentals: Forecasting with long maturity forward rates

• Published in: Journal of international money and finance Vol. 143; p. 103067
• Main Authors: Darvas, Zsolt, Schepp, Zoltán
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.05.2024
• Subjects: Error correction; Exchange rates; Forecasting performance; Monetary model; Out-of-sample; Random walk; Exchange rates; F41; F31; Random walk; Monetary model; Forecasting performance; G15; F37; Error correction; Out-of-sample

•The unobserved expected future exchange rate is eliminated from a theoretical model.•The long-maturity forward exchange rate is a proxy for exchange rate disequilibrium.•A new error correction model leads to unprecedented forecasting results.•Both short-horizon and long-horizon out-of-sample predic...